Lessons for Chinese Companies as They Go Global

Flush with cash, credit, and the ambition to become global players, leading Chinese firms are taking advantage of the fear and tumbling stock markets in America and Europe to increase their international presence. While this is certainly slowing, the country has not been wracked by the credit squeeze that has hit the rest of the world, as there is the tacit feeling that the government will bail out any of the big banks in distress.

Chinese firms are in the hunt to use their cash to make acquisitions, as Industrial & Commercial Bank of China did with Standard Bank in South Africa last year. With plummeting valuations and weakened American firms slashing payrolls and marketing budgets, look for the trend to continue.

In the last few months, my firm, the China Market Research Group, has conducted more than 500 interviews with senior executives from 100 leading Chinese companies in 10 industries, from consumer products to clothing to food and beverage. We found that more than 70% of large industry leaders have already made meaningful steps toward global expansion, as have more than a third of smaller industry leaders. Most companies said they expected to increase their plans for international expansion in light of the global turndown.

Accordingly, direct investment by Chinese companies abroad is growing at breakneck speed, up 353% to $19.34 billion in the first quarter of 2008 compared with the first quarter of 2007. Many companies, such as home appliance maker Haier, have had considerable success becoming international players as they carve out niches and compete on brand value. While most Chinese firms have focused on expanding first into emerging markets in the Middle East and Africa, they are now also looking to North America and Europe and new opportunities in those regions.

In our experience in helping companies go global, we have noticed many Chinese companies making the same mistakes when going abroad that foreign firms make when moving into China. Having analyzed these successes and struggles, CMR has determined the following key strategy points that Chinese companies looking to go global must incorporate into their expansion plans. The Chinese firms that get it right will become the next Sony (NYSE:SNE) or LG Electronics in the U.S. The ones that do not will fall the way of the Yugo.

DEFINE YOUR BRAND

Most Chinese companies have focused on selling at the cheapest possible price rather than by creating a long-term brand image. In China, where many consumers lack the brand savvy and disposable incomes of American consumers, this strategy has often paid off. However, in the U.S., brand loyalty is higher and consumers buy for emotional reasons, so it is critical that Chinese companies find their niche and develop a sustainable brand strategy. If they do not, they will essentially commoditize themselves and lose when a lower-cost brand from a Vietnam or India emerges.

A case of a company doing a weak job when expanding internationally is sports apparel maker Li Ning. Although it competes head-to-head with Adidas and Nike (NYSE:NKE) in China, and gained worldwide fame for having Li Ning himself run around the Bird's Nest to light the Olympic flame, the company has not made great inroads into the U.S. because of subpar marketing. In China, Li Ning positions itself as the best Chinese brand rather than a good-value brand or the most innovative brand, but that is not a strategy transferable to the U.S., where Li Ning himself has low name recognition.

Li Ning's first celebrity endorser in the U.S. was fourth-tier National Basketball Assn. player Damon Jones, not the kind of player kids on playgrounds want to emulate when compared to Nike campaigns involving LeBron James, Tiger Woods, or Michael Phelps. Li Ning has failed to determine its core market or brand niche; sputtering North American sales are a result.

On the opposite end of the spectrum, Haier may be the best example to date of successful branding abroad by a Chinese company. Instead of trying to compete in the market for large, high-end refrigerators as it does in China, Haier reinvented itself for the American market. It introduced a multipurpose mini-refrigerator designed for use in college dormitories and as a small wine cellar. Haier's niche products rapidly gained in popularity.

Combined with its legendary commitment to quality control - Chairman Zhang Ruimin smashed faulty refrigerators with a sledgehammer early on in the company's history to emphasize the importance of quality to his employees - Haier leveraged its niche to move into different product lines and grab market share in the U.S. This growth has helped fuel the company's 40% annual growth rate since 2000.

By focusing on building its brand first and introducing niche but high-quality products, Haier delivered a clear and unique value proposition to American consumers. It is critical that Chinese firms that go abroad understand what their value proposition is to consumers.

BALANCE HQ AND LOCAL LEADERSHIP

Another problem that companies run into when they move abroad is figuring out how to balance control between home country headquarters and local management and maintain corporate culture in distant offices. Chinese companies can look to the experiences and mistakes many Western companies have committed when entering China.

eBay (NASDAQ:EBAY) serves as a good example of what not to do. After acquiring local auction house EachNet, eBay started to centralize its decision-making from headquarters. Having earned the dominant position in the U.S. market, eBay executives had very strong opinions about how the company should be run in China. However, when applied to China, many of its winning strategies no longer delivered and did not fit the wants and needs of Chinese consumers.

Although eBay initially had the dominant share in the auction space, the American company bungled its lead and lost its position to Alibaba.com's Taobao e-commerce service, primarily because of eBay's inability to bridge the divide between the local office and headquarters.

Chinese companies should learn from this example and resist relying entirely on headquarters in China to make decisions. Local management teams need enough autonomy to make decisions and give the company flexibility on the ground. Home-office decisions will often not be fast enough or on point enough to allow a company to thrive. Additionally, foreign managers need to be recruited and know that there is no glass ceiling for them within the organizations.

MAKE ACQUISITIONS—THE SMART WAY

Many of the respondent companies we interviewed that were most successful in their overseas expansion were those which had used M&A as a means of going abroad, and used it right. For many Chinese companies, mergers and acquisitions can be not only a quick way to gain market share abroad, but a means of access to expertise and cutting-edge technologies. With the financial crisis today creating a lot of buying opportunities in undervalued companies with good talent, M&A can also be used to overcome the difficulty of finding the right mix of talent to lead the company in its push to grow overseas, which was considered a top challenge in overseas expansion by a full 75% of executives we interviewed.

Beijing Hualian Group used M&A to gain its foothold abroad. It purchased Seiyu Wing-On, a Singapore department store chain, in 2005 for $2.36 million. Beijing Hualian kept Seiyu's executives and employees as a way to learn the skills necessary to smooth operations in the Singapore retail market. Only last year did it change the store name from Seiyu to BHG, a name created specially for its overseas locations. Since the acquisition, BHG has opened another store in Singapore and brought the international brand name back to China to help boost sales in its Hualian stores.

M&A is not just an easy solution, though. While Lenovo has ultimately done very well in establishing itself as an international brand, Chinese companies should learn from Lenovo's initial struggle with its M&A endeavors. The company purchased IBM's (NYSE:IBM) PC division for $1.35 billion and came away with a marquee brand in the ThinkPad line, offering laptops with a clearly defined image as a bulletproof business workhorse. Lenovo ran into problems, however, integrating IBM into its overall operations. It ended up focusing key resources on the resolution of management disputes, thereby detracting attention and resources from its core market in China. In the meantime, Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ), which initially had vastly inferior supply networks in China, were able to steadily gain market share and compete with Lenovo at home.

Cash-rich Chinese companies can and should attempt to gain expertise and market share through acquisitions. However, companies must consider carefully the specific strengths and problem areas the acquired company will bring to the table and how best to incorporate and benefit from them.

The Chinese companies that get the right marketing and human resource strategies in place will be able to take advantage of the world's slowing economy to emerge as global brands.

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